The space sector has entered a renaissance period, ripe with growth, new ideas, new players…and disruption. But a rising tide rarely raises all ships, so we are likely to see a mixture of winners and losers over the next several years.
Macro-level signposts suggest that the space industry will be a high-beta environment – a wave that many venture capitalists, investors, and corporations will ride prosperously. In fact, Northern Sky Research projects that the overall demand for satellite data will grow annually at 30% between now and 2025, while revenue among operators paces at 17% – exceptional rates in any market. Additionally, PwC’s Strategy& analysis of announced constellations suggests the number of operational spacecraft could grow from about 1,400 today to over 6,500 in the next 8-10 years. New competitors and investors are flocking to space with innovations around the technologies, applications, and business models employed. Visionaries are even now looking toward the development of industry in space around resources and manufacturing – a step many thought was still science fiction only five years ago.
At the same time, this enthusiasm over the industry’s growth potential is being tempered by those who have been in the industry for some time. The largest single customer globally – the US government – saw growth rates on purchased space vehicles (e.g., rockets, probes, satellites) go from 23% during the period from 2000-2012 to flat or even negative since 2012 (this excludes classified spacecraft). Prices for bandwidth may fall by a factor of at least 4 in many applications, while launch revenues are cut by at least 50% with reusable rockets. Financing options like US export-import banks have largely diminished, changing both the risk and economic calculus. All these factors have materialized in the bottom lines of legacy industry leaders, resulting in major layoffs over the past two years.
What is causing this apparent discrepancy between a bullish sector and the challenges faced by some of the industry leaders across the value chain? A simple answer is that new competitors, buying behaviors, and technologies have disadvantaged some legacy players. These, though, are indicators or symptoms of new perspectives about the business models enabling success in the evolving market. The disruptors in today’s market have changed the way we consider revenue sources, costs, and the value chain itself.
Smart players are finding new ways to create and capture revenues along the value chain. This has materialized in two forms. First, companies are filling in gaps in the value chain to enhance access to space or the overall economics for traditional segments. Businesses investing in launch ride-sharing, in-orbit MRO, and debris capture are emerging to make space more accessible and affordable. Second, companies are shifting value from selling space services to investing in space as a means to provide access to other services.
By rethinking prevailing assumptions about the space market, both top-line and bottom-line, a new wave of competitors has begun to put some legacy players on the defensive. They have found new ways to deliver value to the market, either displacing the incumbents or finding white space that had been ignored. Legacy players can still demonstrate a track record of reliability that many new players cannot, but that advantage erodes with every successive year.
Multiple Silicon Valley tech giants have placed bets on the space industry as a means to support their core technology businesses (e.g., employing space-based Earth observation [EO] systems to provide imagery for mapping and autonomous vehicle programs or using space to reach remote populations). By taking a direct stake in the space industry like this, these tech giants effectively relegate space platforms to cost centers.
Additionally, over the past 5-10 years, businesses have been applying Silicon Valley concepts to space industry operations. New entrants, unencumbered by existing sourcing contracts, attitudes, and designs, built their solution from the bottom-up. They applied concepts of rapid prototyping and additive manufacturing to reduce development costs. They employed use of COTS solutions where possible to cut material costs. Some companies have gone so far in developing their platforms as to effectively consider them in “perpetual beta,” constantly finding incremental upgrades with each successive production batch. These successes have effectively obviated the learning curve benefits enjoyed by traditional players.
Staying ahead of the competition
As legacy competitors in particular consider the future of the market, they have some difficult choices to make. ”Hunkering down” will become less viable over time whether you are a launch provider, a spacecraft operator, a prime integrator of space vehicles, or a supplier. Certainly, new technological innovations could pump new life into many of the traditional competitors, but that becomes a gamble, vulnerable to leap-frogging and instant obsolescence in an industry that was historically – but is less so now – insulated from Moore’s Law. We see four paths to recapturing and retaining dominant positions.
- Consolidate your market position. As alternatives grow to existing market models, the market space to which legacy competitors are accustomed will effectively erode. Bespoke satellite manufacturing is already seeing this stagnation or even decline in some segments, raising a question as to whether there is too much capacity. Some consolidation among satellite primes and operators is likely in the next five years.
- Explore new business models. A more difficult, but perhaps more rewarding, play for some competitors will be to adapt to the new business models. This shift in models may include changes in cost models, new revenue models, or degrees of vertical (i.e., new value chain positions) or horizontal (i.e., new segments) integration.
- Expand to new customers. Many regions beyond the traditional space markets are attempting to create the kind of capability the US and Europe have had for decades. Countries like India, UAE, and Brazil are investing heavily in new government and commercial capabilities. Legacy players may see opportunities to partner here, but it likely requires rethinking of operations, supply base, etc. As written in the recently published Strategy& 2017 A&D trends, competing in other markets should be accompanied by a localized operational strategy.
- Prepare for the next wave. Already, commercial and public sector players are positioning for the next evolution of the space industry. This includes moving beyond the traditional applications of science, communications, and defense/intelligence in space to a broader industrial context. Resource exploitation, expanded human spaceflight, and even zero-gravity manufacturing are areas of increasing interest. For most now, these evolutions are questions of when, not if. Competitors with strong engineering and manufacturing could begin to examine how they become leaders in such an extraterrestrial industrial environment. This may require collaboration with the terrestrial analogs (e.g., mining companies, precision materials manufacturing), but in any case would be positioning for a long game.
The space industry is undeniably at a major inflection point, where change one way or another is virtually inevitable. All players, but especially legacy competitors, will be challenged to adapt in the new environment. Some players will win in a growing market because they adjust to the new realities. Others will find they have been bypassed by an industry that expects new capabilities and business models than those expected historically. We are already seeing the beginnings of this change. Legacy players are reshaping themselves through industry-moving M&A, and manufacturers are demonstrating a commitment to new development models and tools (e.g., additive manufacturing). As we have explored these types of plays with our clients, we continue to emphasize development of a coherent vision of their future – one that builds on their strengths to enable them to adapt to future waves of change.
 Northern Sky Research. (July 11, 2016). “FSS Satellite Capacity Flatlines while HTS Growth is in Full Swing” [Press release].
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